Double Taxation by Vishal Salwan

8/2/2019 Double Taxation by Vishal Salwan

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Assignment onDouble Taxation Avoidance agreement

Submitted to: Submitted by:

Ms. Rekha Handa Vishal Salwan

Assistant Professor MBA HONS FS IV

Roll No. 1044

DEPARTMENT OF COMMERCE & BUSINESS MANAGEMENT

GURU NANAK DEV UNIVERSITY

AMRITSAR

2010-2012


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Double Taxation

Definition:

Double taxation is the imposition of two or more taxes on the same income (in the case of income

taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to

taxation by two or more countries of the same income, asset or transaction, for example income paid by

an entity of one country to a resident of a different country. The double liability is often mitigated by tax

treaties between countries. For e.g. An NRI will have to pay tax on the income earned in India onsource basis i.e. where income accrues or arises. On the same income, tax will have to be paid in thecountry of residence on residence basis. As such, an NRI will end up paying Income-tax twice onthe same income. Tax Treaties provide protection to tax payers against such double taxation.

International double taxation agreements

It is not unusual for a business or individual who is resident in one country to make a taxable gain

(earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that

gain locally and pay again in the country in which the gain was made. Since this is inequitable, many

nations make bilateral double taxation agreements with each other. In some cases, this requires that

tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining

cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer

receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has

already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be non-

resident there. So the second aspect of the agreement is that the two taxation authorities exchange

information about such declarations, and so may investigate any anomalies that might indicate tax

evasion.

Double taxation avoidance agreement signed by India

India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 79 countries. This means

that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a

tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions,

Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation.

Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, whileSection 91 provides relief to tax payers who have paid tax to a country with which India has not signed a

DTAA. Thus, India gives relief to both kinds of taxpayers.

A large number of foreign institutional investors who trade on the Indian stock markets operate from

Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of

shares are taxable in the country of residence of the shareholder and not in the country of residence of

the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of
http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mauritiushttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Tax_treatyhttp://en.wikipedia.org/wiki/Mauritiushttp://en.wikipedia.org/wiki/India


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an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will

escape tax altogether.

The Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial

treatment of capital gains.

It must be noted that India has and is making attempts to revise both the Mauritius and Cyprus tax

treaties to eliminate this favorable treatment of capital gains tax. The Indian government periodically

checks for its DTAA with many countries and come up with amendments.

OBJECTIVES OR NEED OF DTAA

(1) Protection against double taxation: These Tax Treaties serve the purpose of providingprotection to tax-payers against double taxation and thus preventing any discouragement which thedouble taxation may otherwise promote in the free flow of international trade, internationalinvestment and international transfer of technology;(2) Prevention of discrimination at international context: These treaties aim at preventingdiscrimination between the taxpayers in the international field and providing a reasonable element oflegal and fiscal certainty within a legal framework;(3) Mutual exchange of information: In addition, such treaties contain provisions for mutualexchange of information and for reducing litigation by providing for mutual assistance procedure;and(4) Legal and fiscal certainty:They provide a reasonable element of legal and fiscal certaintywithin a legal framework.

Methods of Eliminating Double Taxation

The objective of double taxation can be achieved Tax treaties employ various methods or a combination

of

(i) Exemption Method -

One method of avoiding double taxation is for the residence country to altogether exclude foreign income

from its tax base. The country of source is then given exclusive right to tax such incomes. This is known

as complete exemption method and is sometimes followed in respect of profits attributable to foreign

permanent establishments or income from immovable property. Indian tax treaties with Denmark,

Norway and Sweden embody with respect to certain incomes.

(ii) Credit Method

This method reflects the underline concept that the resident remains liable in the country of residence on

its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the

source country is given by the residence country against its domestic tax as if the foreign tax were paid to

the country of residence itself.

(iii)Tax-Sparing

One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment

flows in India from foreign developed countries. One way to achieve this aim is to let the investor to

preserve to himself/itself benefits of tax incentives available in India for such investments
http://en.wikipedia.org/wiki/Capital_gains_taxhttp://en.wikipedia.org/wiki/Capital_gains_tax


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Adoption by Central Government of agreement between specified associations for double taxation

relief.

Countries with which agreement exists

Section 90A.

(1) Any specified association in India may enter into an agreement with any specified associationin the specified territory outside India and the Central Government may, by notification in the

Official Gazette, make such provisions as may be necessary for adopting and implementing suchagreement

(a) for the granting of relief in respect of(i) income on which have been paid both income-tax under this Act and income-tax in

any specified territory outside India; or

(ii) income-tax chargeable under this Act and under the corresponding law in force in

that specified territory outside India to promote mutual economic relations, trade

and investment, or

(b) for the avoidance of double taxation of income under this Act and under thecorresponding law in force in that specified territory outside India, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax

chargeable under this Act or under the corresponding law in force in that specified

territory outside India, or investigation of cases of such evasion or avoidance, or(d) for recovery of income-tax under this Act and under the corresponding law in force in

that specified territory outside India.

(2) Where a specified association in India has entered into an agreement with a specified

association of any specified territory outside India under sub-section (1) and such agreement has

been notified under that sub-section, for granting relief of tax, or as the case may be, avoidanceof double taxation, then, in relation to the assessee to whom such agreement applies, the

provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1)

shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Actor the agreement, have the same meaning as assigned to it in the notification issued by the

Central Government in the Official Gazette in this behalf.

Explanation 1.For the removal of doubts, it is hereby declared that the charge of tax in respect

of a company incorporated in the specified territory outside India at a rate higher than the rate atwhich a domestic company is chargeable, shall not be regarded as less favourable charge or levy

of tax in respect of such company.


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Explanation 2.For the purposes of this section, the expressions

(a) specified association means any institution, association or body, whetherincorporated or not, functioning under any law for the time being in force in India or

the laws of the specified territory outside India and which may be notified as such by

the Central Government for the purposes of this section;

(b) specified territory means any area outside India which may be notified as such by theCentral Government for the purposes of this section.]

Example

Agreement with Mauritius - Any resident of Mauritius deriving income from alienation ofshares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius

tax law and will not have to pay any capital gains tax in IndiaCircular: No. 682, dated 30-3-

1994.

The provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and

Mauritius. Article 4 of the DTAC defines a resident of one State to mean any person who, underthe laws of that State is liable to taxation therein by reason of his domicile, residence, place of

management or any other criterion of a similar nature. Foreign Institutional Investors and other

investment funds, etc., which are operating from Mauritius are invariably incorporated in that

country. These entities are liable to tax under the Mauritius Tax law and are, therefore, to beconsidered as residents of Mauritius in accordance with the DTAC.

Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of theshareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC,

tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending

upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, taxwas deductible at source at the rates specified under section 115A, etc. Doubts have been raised

regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified

that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificatewill constitute sufficient evidence for accepting the status of residence as well as beneficial

ownership for applying the DTAC accordingly.

Countries with which no agreement exists

Section 91.

(1) If any person who is resident in India in any previous year proves that, in respect of hisincome which accrued or arose during that previous year outside India (and which is not deemed

to accrue or arise in India), he has paid in any country with which there is no agreement under

section 90for the relief or avoidance of double taxation, income-tax, by deduction or otherwise,under the law in force in that country, he shall be entitled to the deduction from the Indian

income-tax payable by him of a sum calculated on such doubly taxed income 78at the Indian rate
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of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if

both the rates are equal.

(2) If any person who is resident in India in any previous year proves that in respect of his

income which accrued or arose to him during that previous year in Pakistan he has paid in that

country, by deduction or otherwise, tax payable to the Government under any law for the timebeing in force in that country relating to taxation of agricultural income, he shall be entitled to a

deduction from the Indian income-tax payable by him

(a) of the amount of the tax paid in Pakistan under any law aforesaid on such income

which is liable to tax under this Act also; or

(b) of a sum calculated on that income at the Indian rate of tax;

whichever is less.

(3) If any non-resident person is assessed on his share in the income of a registered firm assessedas resident in India in any previous year and such share includes any income accruing or arising

outside India during that previous year (and which is not deemed to accrue or arise in India) in acountry with which there is no agreement undersection 90for the relief or avoidance of doubletaxation and he proves that he has paid income-tax by deduction or otherwise under the law in

force in that country in respect of the income so included he shall be entitled to a deduction from

the Indian income-tax payable by him of a sum calculated on such doubly taxed income soincluded at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or

at the Indian rate of tax if both the rates are equal.

Explanation.In this section,

(i) the expression Indian income-tax means income-tax79[***] charged in accordance

with the provisions of this Act;

(ii) the expression Indian rate of tax means the rate determined by dividing the amount

of Indian income-tax after deduction of any relief due under the provisions of this Actbut before deduction of any relief due under this80[Chapter], by the total income;

(iii) the expression rate of tax of the said country means income-tax and super-tax

actually paid in the said country in accordance with the corresponding laws in force inthe said country after deduction of all relief due, but before deduction of any relief due

in the said country in respect of double taxation, divided by the whole amount of the

income as assessed in the said country;

(iv) the expression income-tax in relation to any country includes any excess profits tax

or business profits tax charged on the profits by the Government of any part of that

country or a local authority in that country.

Double Taxation Relief:

India has entered into DTAA with 65 countries including countries like U.S.A., U.K.,Japan, France, Germany, etc. These agreements provides for relief from the double
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taxation in respect of incomes by providing exemption and also by providing credits fortaxes paid in one of the countries. These treaties are based on the general principles laiddown in the model draft of the Organisation for Economic Cooperation andDevelopment (OECD) with suitable modifications as agreed to by the other contractingcountries. In case of countries with which India has double taxation avoidance

agreements, the tax rates are determined by such agreements and are indicated forvarious countries as under:

Country Dividends

%

Interest

%

Royalties

%

Australia 15 15 15

Austria 20 20 30

Bangladesh 15 10 10

Belarus 15 10 15

Belgium 15 15 20

Brazil 15 15 15

Bulgaria 15 15 20

Canada 25 15 15

China 10 10 10

Cyprus 15 10 15

Czechoslovakia 20 15 30

Czech Republic 10 10 10

Denmark 20 15 20

Egypt 20 20 30

Finland 15 10 20

France 10 15 10/20


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Germany 10 10 10

Greece 20 20 30

Hungary 15 15 30

Indonesia 15 10 15

Israel 10 10 10

Italy 20 15 20

Japan 15 15 20

Jordan 10 10 20

Kazakhstan 10 10 10

Kenya 15 15 20

Korea 20 15 15

Kyrgyzstan 10 10 15

Libya 20 20 30

Malaysia 20 20 30

Malta 15 10 15

Mauritius 15 20 15

Mongolia 15 15 15

Morocco 10 10 10

Namibia 10 10 10

Nepal 15 15 15

Netherlands 10 10 10

New Zealand 15 10 10

Norway 15 15 30


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Oman 12.5 10 15

Philippines 20 15 15

Poland 15 15 22.5

Portugal 15 10 10

Qatar 10 10 10

Romania 20 15 22.5

Russian Federation 10 10 10

Singapore 15 15 15

South Africa 10 10 10

Spain 15 15 20

Sri Lanka 15 10 10

Sweden 10 10 10

Switzerland 15 15 20

Syria 0 7.5 10

Tanzania 15 12.5 20

Thailand 20 20 15

Trinidad andTobago

10 10 10

Turkey 15 15 15

Turkmenistan 10 10 10

United ArabEmirates

15 12.5 10

United Kingdom 15 15 15

United States 20 15 15


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Uzbekistan 15 15 15

Vietnam 10 10 10

Zambia 15 10 10

Non treaty countries 0 20 20

Double Taxation in India

India has entered into Double Taxation Avoidance Agreements (DTAA) with 65 countries

including countries like U.S.A., U.K., Japan, France, Germany, etc. These agreements providefor relief from double taxation in respect of incomes by providing exemption and also by

providing credits for taxes paid in one of the countries. These treaties are based on the general

principles laid down in the model draft of the Organisation for Economic Cooperation andDevelopment (OECD) with suitable modifications as agreed to by the other contracting

countries. A typical DTA agreement between India and another country covers only residents of

India and the other contracting country which has entered into the agreement with India. Aperson who is not a resident either of India or of the other contracting country cannot claim any

benefit under the said DTA agreement. Such agreement generally provides that the laws of the

two contracting states will govern the taxation of income in respective states except when

express provision to the contrary is made in the agreement. A situation may arise when originallythe tax provision in the other contracting state gave concessional treatment compared to India at

a particular time but Indian laws were subsequently amended to bring incidence of tax to a level

lower than the tax rate existing in the other contracting state.Since the tax treaties are meant to bebeneficial and not intended to put taxpayers of a contracting state to a disadvantage, it is

provided in Sec.90 that a beneficial provisions under the Indian Income Tax Act will not be

denied to residents of contracting state merely because the corresponding provision in tax treatyis less beneficial.

Some Double taxation avoidance agreements provide that income by way of interest, royalty orfee for technical services is charged to tax on net basis. This may result in tax deducted at source

from sums paid to non- residents which may be more than the final tax liability.

Taxation of Business Profits under DTA agreements

One of the important terms that occurs in all the Double Taxation Avoidance Agreements is theterm 'Permanent Establishment' (PE) which has not been defined in the Income Tax Act.However as per the Double Taxation Avoidance Agreements, PE includes, a wide variety of

arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a

warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done


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only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and

independent enterprise.

In order to avoid double taxation it is provided that if a resident of India becomes liable to pay

tax either directly or by deduction in the other country in respect of income from any source, he

shall be allowed credit against the Indian tax payable in respect of such income in an amount notexceeding the tax borne by him in the other country on that portion of the income which is taxed

in the said other country. The same benefit is available to the resident of the other Country, onincome taxed in India.

In respect of incomes on which taxes are either exempted or reduced, the country of residencewill not take the exempted income into account while determining the tax to be imposed on the

rest of the income.

Taxation of Income from Air and Shipping Transport under DTA agreements

Income derived from the operation of Air transport in international traffic by an enterprise of onecontracting state will not be taxed in the other contracting state. In respect of an enterprise of one

contracting state, income earned in the other contracting state from the operation of ships in

international traffic, will be taxed in that contracting state wherein the place of effectivemanagement of enterprise is situated. However some DTA agreement contain provisions to tax

the income in the other contracting state also, although at reduced rate. These provisions do notapply to coastal traffic.

Taxation of Income from Associated Enterprises under DTA agreements

In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for

taxing the notional income deemed to arise on account of an enterprise of one contracting stateparticipating directly / indirectly in the management of another enterprise in the other contractingstate or where some persons participate directly or indirectly in both the enterprises under

conditions different from those existing between the independent enterprises.

Taxation of Dividend Income under DTA agreements

Dividend paid by a Company which is a resident of a Contracting State to a resident of the other

Contracting State will be taxed in both the States.

Taxation of Interest Income under DTA agreement

Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in

both the States.

Taxation of Income from Royalties under DTA agreements

Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting

State


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1. Some DTA agreements provide for taxation in the other Contracting State.2. Some agreements provide for taxation in the contracting State.3. Some agreements provide for taxation in both the States.

Taxation of Income from Capital Gains under DTA agreements

Capital Gains will be taxed in the state where the capital asset is situated at the time of sale.

Taxation of Income from Professional Services under DTA Agreements

Income will be taxed in the state where the person is a resident. However if he has a fixed base in

the other Contracting State, the income attributable to the fixed base will be taxed in the othercontracting state.

Withholding Tax for NRIs and Foreign Companies

Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Actpassed by the Parliament for various years. The current rates are:

1. Interest - 20% of Gross Amount2. Dividends - 10%3. Royalties - 20%4. Technical Services - 20%5. Any other Services - Individuals - 30% of net income

Companies/Corporates - 40% of net income

The above rates are general and in respect of the countries with which India does not have aDouble Taxation Avoidance Agreement (DTAA).

Recent NEWS

India concludes Double Taxation protocol with Singapore

New Delhi, June 25, 2011(ANI): India has signed a protocol amending Double TaxationAvoidance Agreement (DTAA) with Singapore for effective exchange of information in tax

matters. The protocol was signed by Central Board of Direct Taxes (CBDT) Chairman PrakashChandra, on behalf of the Indian Government, and High Commissioner of Singapore to India

Karen Anne Tan Ping Ming, on behalf of the Singapore Government, on Friday.

The negotiations for entering into an amending protocol were completed in one round at

Singapore.


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"Both India and Singapore have adopted internationally agreed standard for exchange of

information in tax matters. This standard includes the principles incorporated in the newparagraphs 4 and 5 of OECD Model Article on 'Exchange of Information' and requires exchange

of information on request in all tax matters for the administration and enforcement of domestic

tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes," a

Union Finance Ministry statement said.

"In the aftermath of the global financial crisis, there is increased recognition on part ofgovernments that improvements in exchange of information in tax matters are a part of a broader

agenda to improve transparency and global governance."

"There is recognition that effective and comprehensive exchange of information in tax matters is

a vital part of the ongoing efforts of revenue authorities to tackle international tax avoidance and

evasion. Towards that end, India and Singapore joined hands for effective exchange of

information including banking information," it added. (ANI)

More Facts (Next Topic)

The Central Government, acting under Section 90 of the Income Tax Act, has been authorised to

enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of

such agreements is to evolve an equitable basis for the allocation of the right to tax different

types of income between the 'source' and 'residence' states ensuring in that process tax neutrality

in transactions between residents and non-residents.

A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of

income arising here by virtue of its being the country of source and then again, in his own

country in respect of the same income by virtue of the inclusion of such income in the 'totalworld income' which is the tax base in the country of residence. Tax incidence, therefore,

becomes an important factor influencing the non-residents in deciding about the location of their

investment,services,technologyetc.

Tax treaties serve the purpose of providing protection to tax payers against double taxation and

thus preventing the discouragement which taxation may provide in the free flow of international

trade, international investment and international transfer of technology. These treaties also aim at

preventing discrimination between the tax payers in the international field and providing a

reasonable element of legal and fiscal certainty within a legal framework. In addition, such

treaties contain provisions for mutual exchange of information and for reducing litigation.

Documents

Double Taxation by Vishal Salwan